How to Get a Loan to Buy a New Business

How to Get a Loan to Buy a New Business
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To get a loan to buy a business, an individual must first select what business to buy. Then they must pick the type of financing which best suits their needs and means. It’s important to investigate the history of the business and get a projection of future profits and consider those numbers concerning the cost of the business. The borrower typically needs a credit score of at least 650 to qualify for a loan, and most loans ask for a down payment of at least 20%. Most lenders will ask for a letter of intent signed by both you and the owner you are planning on buying from. The letter of intent works as evidence for lenders that you will purchase the business under the condition that you get the necessary funding.

It’s important to shop around for the loan that works best for your particular situation. We’ve broken down some different financing options for you below.

What’s Covered in this Article:

  1. Business Line of Credit
  2. Refinance Your Home
  3. Rollover for Business Startups (ROBS)
  4. SBA 7a Loans
  5. Seller Financing

Business Line of Credit

To get a loan to buy a business, an individual must first select what business to buy. Then they must pick the type of financing which best suits their needs and means. It’s important to investigate the history of the business and get a projection of future profits and consider those numbers concerning the cost of the business. The borrower typically needs a credit score of at least 650 to qualify for a loan, and most loans ask for a down payment of at least 20%. Most lenders will ask for a letter of intent signed by both you and the owner you are planning on buying from. The letter of intent works as evidence for lenders that you will purchase the business under the condition that you get the necessary funding.

It’s important to shop around for the loan that works best for your particular situation. We’ve broken down some different financing options for you below.

Refinance Your Home

If you are making payments on your home, you may be able to get a home equity line of credit to fund the acquisition of the business. A home equity line of credit using the equity (the difference between the value of your home and the amount of debt you have on your mortgage) of your home as collateral. Using your home as collateral can help you qualify for a larger loan with more favorable terms. However, it’s important to remember that many business acquisitions are risky ventures, and it’s not always wise to risk your home.

It’s important to shop around for the loan that works best for your particular situation. We’ve broken down some different financing options for you below.

Rollover for Business Startups (ROBS)

In most cases, if you have more than $50,000 in a 401(k) or a retirement account, you may use it to qualify for an SBA loan. You can do this while avoiding penalties or taxation by basically declaring the business you’re buying as part of your retirement plan, the business is technically owned by your plan and not you the individual. While this is a cost-effective way to buy a business, it is also a high-risk way to buy a business. If the business fails, then you not only lose the income from the business, you lose your savings as well.

It’s important to shop around for the loan that works best for your particular situation. We’ve broken down some different financing options for you below.

SBA 7a Loans

If your business meets the size standards and is a “sound business idea” it could be accepted by the SBA. SBA loans are backed by the Small Business Administration (SBA) which guarantees the loans lowering the risk for lenders. This leads to lower rates than most conventional business loans, but also more restrictions. There is also a notable increase in paperwork, as you need the approval of both the SBA and the private lender. To qualify for an SBA 7(a) loan the business you’re buying needs to have fewer than 500 employees and have annual revenue of less than $7 million. SBA 7(a) loans can be up to $5 million.

While SBA loans can be more complicated to navigate, they are most often worthwhile as the saving are significant.

It’s important to shop around for the loan that works best for your particular situation. 

Seller Financing

If your business meets the size standards and is a “sound business idea” it could be accepted by the SBA. SBA loans are backed by the Small Business Administration (SBA) which guarantees the loans lowering the risk for lenders. This leads to lower rates than most conventional business loans, but also more restrictions. There is also a notable increase in paperwork, as you need the approval of both the SBA and the private lender. To qualify for an SBA 7(a) loan the business you’re buying needs to have fewer than 500 employees and have an annual revenue of less than $7 million. SBA 7(a) loans can be up to $5 million.

While SBA loans can be more complicated to navigate, they are most often worthwhile as the saving are significant.

It’s important to shop around for the loan that works best for your particular situation. We’ve broken down some different financing options for you below.

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